The BoC will have to walk a tight rope next week with its interest rate decision: TD's Kelvin
Canada’s economy picked up momentum at the start of this year after a pandemic-ravaged 2020.
A flash estimate released by Statistics Canada Tuesday morning indicated gross domestic product rose approximately 0.5 per cent in January. By contrast, the economy expanded just 0.1 in December.
According to StatsCan, the mining and energy industries led the way in the month with a gain of 2.9 per cent. Meanwhile, the retail, accommodation and food services industries experienced another month of contraction as public health restrictions designed to curb the spread of COVID-19 continued to limit activity.
“If that January number is right, plus half a percentage point is extremely strong for a monthly GDP number in any circumstance.” said TD Securities Chief Canada Strategist Andrew Kelvin in an interview on Tuesday. “It means we will get through the second wave of COVID without seeing a negative month of GDP -- which is frankly stunning,”
Kelvin was by no means alone in expressing surprise at Canada’s economic resilience. In a report to clients, BMO Capital Markets Chief Economist Douglas Porter said his team has boosted its full-year growth estimate by a full percentage point to six per cent.
That would mark a strong reversal from 2020, when the economy contracted 5.4 per cent, as Statistics Canada reported Tuesday.
The update on Canada’s economic output raised fresh questions about how Canada’s top economic policymakers will respond, particularly in light of the Bank of Canada’s forecast in January that GDP would shrink 2.9 per cent in the first quarter of this year.
Kelvin said the central bank will have to “walk a real tight rope” when it releases its interest rate decision on March 10.
“On one hand, they do have to acknowledge that the outlook is better than it was six or eight weeks ago when we last heard from them. They can't just stick their head in the sand and pretend it hasn't happened,” he said.
“But on the other hand they don't want to give too much fuel to the fire that we've seen in bond markets where we've started to re-price central bank expectations rapidly higher, because that causes financing conditions to tighten across the economy.”